RBI has, on July 15, 2024, issued separate Master Directions on fraud risk management for commercial banks and for non-banking financial companies (‘NBFCs’).

These Master Directions, inter alia, require banks/NBFCs to: (i) put in place board approved policies on fraud risk management which include issuance of a detailed show cause notice (‘SCN’), providing a reasonable timeline for responding to the SCN, and conveying the decision of the bank/NBFC’s board through a reasoned order; (ii) ensure earlier detection of frauds by putting in place a framework for ‘Early Warning Signals’ and ‘Red Flagging of Accounts’ under the board-approved overall fraud risk management policy; (iii) monitor activities in credit facility/loan account and to identify fraudulent activities; (iv) use, in case of suspicion or indication of fraudulent activity, an external or internal audit for further investigation, and to include clauses in loan agreements with borrowers for conduct of such audit at the behest of bank/NBFC upon red flagging of the account.

Persons/entities classified and reported as fraud by banks/NBFCs and associated person/entities are also debarred from raising funds from regulated entities for five years from full repayment of the defrauded amount or the settlement amount agreed upon in case of a compromise settlement. Thereafter, the discretion to entertain or decline requests from such persons/entities lies solely with the banks/NBFCs.